House Prices in All 50 Top Markets Are More Affordable Than Their Housing Boom Peaks, According to First American Real House Price Index

—If prices continue to outpace house-buying power, affordability will suffer, but we’re still a long way from 2006, says Chief Economist Mark Fleming—

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the July 2021 First American Real House Price Index (RHPI). The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

Chief Economist Analysis: Record-Breaking Nominal House Price Appreciation Outpacing House-Buying Power Growth

“In July, housing affordability continued its decline as year-over-year nominal house price appreciation reached a record 20 percent, vastly outpacing the increase in house-buying power compared with a year ago,” said Mark Fleming, chief economist at First American. “The Real House Price Index (RHPI) measures affordability in the context of changes in consumer house-buying power, incorporating changes in household income, mortgage rates and nominal house prices. House-buying power, how much one can buy based on changes in income and interest rates, increased by 3.8 percent in July compared with one year ago, propelled by lower mortgage rates and higher household income.

“However, while affordability declined again in July, it’s helpful to put affordability in historical context. Nationally, nominal house prices in July were 35 percent higher than at the housing boom peak for prices in 2006, yet real, house-buying power-adjusted house prices remain nearly 38 percent below their 2006 housing boom peak,” said Fleming. “But real estate is local, and the recovery from the housing boom and crash varies by market, so where has affordability improved the most compared with the prior peak?”

Home Prices Are More Affordable Than During the Previous Housing Peak in All 50 Top Markets

“For nominal house prices, all 50 markets we track have surpassed their previous housing peaks, but some markets have only done so recently,” said Fleming. “For example, Chicago (2 percent), Baltimore (3 percent), Washington (4 percent), Virginia Beach, Va. (8 percent) and Hartford, Conn. (9 percent) have only modestly surpassed their previous nominal price peaks. The remaining 45 markets have surpassed their peaks by at least 10 percent.

“Yet, the level of nominal house prices doesn’t tell the affordability story. While nominal house prices have increased, house-buying power has also increased because of a long-run decline in mortgage rates and the slow, but steady growth of household income. House-buying power matters because people typically buy homes based on how much it costs each month to make a mortgage payment, not the price of the home,” said Fleming. “Mortgage rates are generally the same across the country, so the long-run decline in mortgage rates boosts affordability equally in each market. Household income growth and nominal house prices, on the other hand, differ from market to market, so affordability varies geographically as well. Based on the house-buying power-adjusted RHPI, we find that affordability is higher in all 50 markets compared to their previous respective RHPI peaks.”

Homes in Chicago are 56 percent More Affordable Today than in July 2006

“According to the Real House Price Index, housing in Chicago was least affordable in July 2006, when mortgage rates were approximately 6.7 percent. Since then, mortgage rates have declined to an average of 2.9 percent in July of this year. At the same time, household income in Chicago has increased by approximately 50 percent,” said Fleming. “The decline in mortgage rates and steady rise in household income resulted in a 135 percent increase in house-buying power, which was more than enough to offset the 2.6 percent increase in nominal house price growth. As a result, homes in Chicago are 56 percent more affordable today than they were in July 2006.

“On average, the markets we track in the RHPI are more than 40 percent more affordable today than at their respective prior peaks. The severe supply-demand imbalance in the housing market continues to fuel record-breaking house price appreciation across the country, yet lower mortgage rates and higher incomes mean homes are more affordable today than at their prior peaks in every market we track.”

Top 5 Markets Where Affordability Has Improved the Most Since Their Prior Peak

1.) Baltimore (58 percent from peak)

2.) Washington (57 percent from peak)

3.) Chicago (56 percent from peak)

4.) Miami (56 percent from peak)

5.) Riverside, Calif. (54 percent from peak)

Top 5 Markets Where Affordability Has Improved the Least Since Their Prior Peak

1.) Nashville, Tenn. (13 percent from peak)

2.) Buffalo, N.Y. (13 percent from peak)

3.) Kansas City, Mo. (19 percent from peak)

4.) Denver (20 percent from peak)

5.) Salt Lake City (24 percent from peak)

What Goes Up, May Continue to Go Up

“While nominal house prices continue to break records, affordability remains vastly improved in most markets relative to their previous peaks,” said Fleming. “The pace of house price appreciation is widely expected to cool, but still increase in the months ahead. If prices continue to outpace house-buying power, affordability will suffer, but we’re still a long way from 2006.”

July 2021 Real House Price Index Highlights

• Real house prices increased 0.2 percent between June 2021 and July 2021.
• Real house prices increased 16.0 percent between July 2020 and July 2021.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 1.63 percent between June 2021 and July 2021, and increased 3.8 percent year over year.
• Median household income has increased 1.9 percent since July 2020 and 64.9 percent since January 2000¹.
• Real house prices are 11.4 percent less expensive than in January 2000.
• While unadjusted house prices are now 34.9 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 37.8 percent below their 2006 housing boom peak.

July 2021 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: Arizona (+24.8 percent), Vermont (+21.8 percent), Nevada (+20.2 percent), Connecticut (+19.6 percent), and Georgia (+18.1 percent).
• There were no states with a year-over-year decrease in the RHPI.

July 2021 Real House Price Local Market Highlights

• Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Phoenix (+28.3 percent), Las Vegas (+21.7 percent), Tampa, Fla. (+21.4 percent), Jacksonville, Fla. (+21.4 percent), and Kansas City, Mo. (+21.1 percent).
• Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.

Next Release

The next release of the First American Real House Price Index will take place the week of October 25, 2021 for August 2021 data.

Sources

• First American Data & Analytics
• Freddie Mac
• Census Bureau

Methodology

The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.

Disclaimer

Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2021 by First American. Information from this page may be used with proper attribution.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $7.1 billion in 2020, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2021, First American was named to the Fortune 100 Best Companies to Work For^® list for the sixth consecutive year. More information about the company can be found at www.firstam.com.

¹ This release includes a revision to the annual income series using the 2020 Current Population Survey Annual Social and Economic Supplement (CPS ASEC)

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